Rarely does one hear of offensive use of the FCPA to accomplish a business objective.  Usually it is the other way around – the FCPA thwarts a business objective such as acquiring a foreign target, not hiring the foreign agent who says he knows a way to get that lucrative contract, etc.

But then again, rarely does one hear of a corporate board member accusing the company of conduct that could implicate the FCPA, which then causes the SEC to open an inquiry, which then results in the company accusing the board member of separate and distinct conduct that could implicate the FCPA.

This post discusses Wynn’s internal investigation report that accuses Kazuo Okada (a member of its board) of prima facie FCPA violations.  For previous posts on the Wynn-Okada dispute, see here and here.  The Wynn internal investigation report (here) discusses a number of issues (such as breach of fiduciary duty, issues under Nevada gaming laws and issues under Philippine law), but this post will focus on the FCPA issues in the report authored Louis Freeh (former Director of the FBI) of Freeh, Sporkin & Sullivan LLP.

In summary, the Freeh Report states as follows.  “Mr. Okada, his associates and companies appear to have engaged in a longstanding practice of making payments and gifts to his two (2) chief gaming regulators at the Philippines Amusement and Gaming Corporation (“PAGCOR”), who directly oversee and regulate Mr. Okada’s Provisional Licensing Agreement to operate in that country.  Since 2008, Mr. Okada and his associates have made multiple payments to and on behalf of these chief regulators, former PAGCOR Chairman Efraim Genuino and Chairman Cristino Naguiat (his current chief regulator), their families and PAGCOR associates, in an amount exceeding $110,000.”  The report categorizes this conduct as “prima facie violations” of the FCPA.

Because jurisdiction will clearly be an issue in any potential FCPA enforcement action against Okada (a Japanese national currently serving as Director and Chairman of the Board of Universal Entertainment Corporation, a Japanese company), the Freeh Report sensibly begins with a jurisdictional analysis.

According to the report, Aruze USA Inc. (“Aruze USA”) is a wholly-owned subsidiary of Universal incorporated in Nevada and Okada is a Director of Aruze USA and serves as its President, Secretary, and Treasurer.  In addition, the report states that Okada also currently serves as a Director, Secretary, and Treasurer of Aruze Gaming America, Inc. (“Aruze Gaming”), a U.S. company.

Thus, based on the information in the Freeh report, depending upon which “hat” Okada wears at any given time, he is, in the language of the FCPA, a “domestic concern” or “any person other than an issuer or a domestic concern.”  The Freeh Report covers both bases and correctly notes that FCPA violations can be committed by a “domestic concern” regardless of any U.S. nexus (this was part of the FCPA’s 1998 amendments), but that FCPA violations can be committed by “any person” only if the “while in the territory of the U.S.” jurisdictional test is met.  If Okada is merely “any person” under the FCPA, the Freeh Report states that “means or instrumentalties of interstate commerce” were used by Okada.  Specifically, the Freeh Report states that many of Okada payments at issue passed through the accounts (either the Universal City Ledger Account or the Aruze City Ledger Account) ”maintained at the corporate offices of Wynn Resorts, Limited in Las Vegas, Nevada where periodic deposits are made from Universal into the Wynn Resorts, Limited operating account at Bank of America in Las Vegas, Nevada.”

Back to the Freeh Report’s discussion of Philippine PAGCOR Officials at Wynn Resort properties.  The report highlights 36 “separate instances, from May 2008 through June 2011 when Mr. Okada, his associates and companies made payments exceeding $110,000 which directly benefited senior PAGCOR officials, including two chairman and their family members.”  For starters, 35 of the 36 instances involve charges to the Aruze City Ledger account in amounts ranging from $253 to $5,380 for stays (generally multi-night stays) at the Wynn Macau or Wynn Las Vegas.  As separately discussed below, the one instance that sticks out is the September 2010 stay of various PAGCOR officials at the Wynn Macau for which approximately $50,000 was charged to the Aruze City Ledger.

The Freeh Report terms all of these instances “prima facie” FCPA violations, a term presumably chosen carefully because as every first-year law student knows “prima facie” means on first appearance, on the face of it, a fact presumed to be true unless disproved by some evidence to the contrary.

It is here that the Freeh Report is shockingly deficient as it does not contain any discussion of the FCPA’s affirmative defense for payments, gifts, etc. that are a “reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official … directly related to (a) the promotion, demonstration, or explanation of products or services; or (b) the execution or performance of a contract with a foreign government or agency thereof.”  The Freeh Report notes, yet disagrees with, Okada’s assertion that “all his efforts in the Philippines prior to the change of presidential administration in the summer of 2010 were undertaken on behalf of and for the benefit of Steve Wynn and Wynn Resorts.”  Summer 2010 is obviously a vague term, but Okada’s assertion could be relevant to 23 of the 36 instances detailed in the Freeh Report.

The one instance identified in the Freeh Report that sticks out is approximately $50,000 charged to the Aruze City Ledger in September 2010 for a five day stay at the Wynn Macau by “then and current PAGCOR Chairman and CEO Cristino L. Naguiat, Jr., his wife, three children, nanny and other PAGCOR officials.”  The Freeh Report devotes five pages to this visit and states, among other things, that Chairman Naguiat occupied Villa 81 (the most expensive accommodation at Wynn Macau – a room that costs approximately $6,000 per day and is mostly reserved for “high-rollers”).  Even if Chairman Naguiat and his delegation visited the resort, in whole or in part, for a business purpose it is unlikely that such expenses would be viewed as “reasonable and bona fide” and directly related to a business purpose – even if the Freeh Report does note that some of the charges may have been reimbursed by Chairman Naguiat’s delegation.

In addition, the Freeh Report says that “Mr. Okada, his associates and companies” made “similar payments to a Korean government official who oversees Mr. Okada’s initial gaming investment in that country.”  The report notes that Okada was pursuing development of a resort complex in the Incheon Free Economic Zone and the report notes six instances in which “possible Korean government officials” stayed at Wynn properties.  Total charges to the Aruze City Account were $5,945 and ranged from $507 to $1,597.  The Freeh Report states that “these payments made for or on behalf of possible Korean government officials may be part of a continuing pattern by Mr. Okada and his associates to commit prima facie violations of the FCPA.”

Finally, the Freeh Report also states that “Universal paid expenses related to then-PAGCOR Chairman Genuino’s trip to Beijing during the 2008 Olympics.

Have there been FCPA enforcement actions focused on excessive and travel entertainment expenses paid to ”foreign officials”?  The answer is yes.  In 2007, Lucent Technologies resolved related DOJ and SEC enforcement actions (see here and here) focused on hundreds of trips for Chinese “foreign officials” that included primarily sightseeing, entertainment and leisure.  According to the allegations in that enforcement action, Chinese “foreign officials” were treated to trips to Boston, Las Vegas, the Grand Canyon and Hawaii “for strictly entertainment, travel and leisure purposes.”  In 2009 UTStarcom resolved related DOJ and SEC enforcement actions (see here for the prior post) focused on hundreds of trips for Chinese “foreign officials” that likewise were to places such as Hawaii, Las Vegas, and New York.

However, in pointing numerous FCPA fingers at Okada, even the Freeh Report points a few fingers back at Wynn.  For instance, as to the accounts Okada allegedly used to make the improper payments the report states as follows.

“As a Director of Wynn Resorts, Mr. Okada is entitled to receive the courtesy of what is called a “City Ledger Account.”  Such accounts were originally instituted as a result of Sarbanes Oxley’s prohibition of extensions of credit, in the form of a personal loan from an issuer to an officer or director.  The accounts were funded by deposits from the director or his company.  Such an account exists for billing conveniences related to charges incurred at various Wynn Resorts locales.  Mr. Okada has availed himself of this courtesy and established such a City Ledger Account.  Within Wynn Resorts, this Okada City Ledger Account is referred to either as the “Universal City Ledger Account” or as the “Aruze City Ledger Account.”"

Elsewhere, the Freeh Report states that funds in connection with the problematic September 2010 visit were “advanced from the Wynn Macau” to a representative of Aruze USA.

In other words, while accusing Okada of committing “prima facie” FCPA violations through his use of the accounts, including the September 2010 visit, the Freeh Report acknowledges that the accounts were provided to him by Wynn as a courtesy for billing conveniences related to charges incurred at various Wynn Resort locales and that portions of the money used in connection with the problematic September 2010 visit were advanced from the Wynn Macau.

The Freeh Report puts the DOJ (and perhaps even the SEC given Okada’s membership on the Wynn Board) in a difficult position.  How can the agencies not investigate the conduct at issue when the former Director of the FBI is terming the conduct “prima facie” FCPA violations.  An analogy would be like calling the fire department to inform that your house is on the fire, but the fire department fails to show up.  Based on media reports, it appears that the agencies are indeed in active investigation mode.  According to a Feb. 24th article in the Financial Times (“US Probes Wynn Resorts’ Allegations), “the US Securities and Exchange Commission’s investigation is looking into allegations that Mr Okada made at least $110,000 in unauthorised payments to two gaming officials in the Philippines” and last week “Wynn’s attorney, Debra Yang, a partner with Gibson Dunn &  Crutcher and former US attorney for the Los Angeles area, flew to Washington and met with criminal prosecutors at the Department of Justice.”

Does the Freeh Report and the FCPA allegations against Okada evidence offensive use of the FCPA to accomplish a business objective?  The FCPA allegations against Okada - a Wynn business rival – contributed to a finding that Okada was “unsuitable” under Nevada gaming regulations, which then facilitated Wynn’s purchase of Okada’s Wynn shares at a substantial discount.

Another way of asking the same question is as follows – if the Freeh report found the same exact conduct (i.e. 36 instances – 35 of which were very minor in scope, totaling $110,000 involving a person other than Okada) would Wynn have gone public with such “prima facie” FCPA violations through a voluntary disclosure?  I highly doubt it.

By publicly stating that Okada’s conduct (36 instances of lodging expenses and entertainment for “foreign officials” – 35 of which were very minor in scope) evidences “prima facie” FCPA violations, is Wynn opening itself up to greater scrutiny as to its own relationships with the “foreign officials” which regulate its businesses abroad?  Is Wynn supremely confident that someone associated with the company did not charge $253 to a corporate account for a ”foreign official” to stay a night at one of its hotels?  Did Wynn leave a chocolate for the “foreign official” on his pillow or pay for a fancy dinner?

In a strange twist to the story, yesterday the Wall Street Journal reported that Wynn competitor Las Vegas Sands CEO Sheldon Adelson stated that “complimentary hotel rooms is a common practice in the gambling industry.”  Las Vegas Sands is already under FCPA scrutiny (see here for the prior post) and if that investigation was not already focused on travel and entertainment issues, you can bet it is headed in that direction.

I agree with Professor Peter Henning who writes the White Collar Crime Watch at the New York Times that Wynn’s accusations against Okada “open up a can of worms” (see here) and that Wynn’s accusations ”means the Justice Department and the Securities and Exchange Commission will be scouring the company’s books for possible violations, a front that neither side can control” and that “by invoking the specter of overseas bribery, Wynn has effectively opened itself up to a wide-ranging federal investigation of its dealings in Macao and elsewhere.”

The question Wynn will have to ask itself as this presumably goes forward is whether it was worth using the unhinged FCPA enforcement theories defining this new era to oust a business rival?

As to the big, big picture, if the DOJ or SEC do bring an enforcement action against Okada (or Wynn) for the conduct described in the Freeh Report, are we prepared to confront the glaring double standard increasingly coming into focus during this new era of FCPA enforcement?  For more on the double standard and corporate benefits given to U.S. officials, see here, here, here, and here.